The lowdown on low down payments

While it's long been the convention in the industry to start with a 20% down payment, the availability of mortgage default insurance means ownership is still possible with as little as 5% down, as long as the buyer meets industry standards of income and creditworthiness.Photo by
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Hot markets and cold feet might keep some people out of the housing market, but a lack of upfront cash doesn't have to be an obstacle. While it's long been the convention in the industry to start with a 20% down payment, the availability of mortgage default insurance means ownership is still possible with as little as 5% down, as long as the buyer meets industry standards of income and creditworthiness.

"What mortgage insurance allows people to do is to get into the market with today's prices, with today's low interest rates, once they have determined that home ownership is right for them," says Mary Stergiadis, principal for Ontario business development at Canada Mortgage and Housing Corp. The insurance repays lenders if a homeowner defaults on payment.

People with insured mortgages can take advantage of the same interest rates as those taking out conventional mortgages, she says. And the insurance doesn't cost as much as some people think.

Here's how it works: With 5% down, the insurance premium is 2.75% of the mortgage. On a $400,000 property with $20,000 down, the mortgage insurance premium would be $10,450. That would bring the total being borrowed to $390,450. Assuming a fiveyear closed at 3.75% amortized over 25 years, the monthly payment would be about $2,000, including less than $55 a month for the insurance. The same property with 20% down would have a monthly payment of $1,640.

"What consumers have to ask themselves is what $60,000 means to them in terms of savings," Ms. Stergiadis says, referring to the amount needed to reach a 20% down payment for this property. "How long would it take to save that additional down payment? Where will home prices be within that time? Where will interest rates be?"

(But note that the tax on the premium - 8% in Ontario - cannot be amortized and is due on closing.) The insurance rate goes down as the down payment goes up. For buyers with 10% down, for instance, the premium is 2%; with 15% down, it's 1.75%.

A popular misconception is that this insurance applies only to the primary residence of the borrower. But it is also available for a second property, such as a home or condo in the city to cut a commute or to house an aging parent or a student. CMHC does not, however, insure recreational properties.

Private mortgage insurers, such as Genworth Canada and Canada Guaranty, also insure high-ratio mortgages. The rates offered match those of CMHC; consumers usually aren't aware of differences, as lenders apply directly to the insurers once an offer has been made and accepted on a property.

Genworth estimates about 30% of Canadian mortgages are insured, down from historical levels of as high as 40%. That percentage tends to be lower in the GTA, says Jason Neziol, Genworth's regional vice-president of sales for Ontario and the GTA. That's because higher prices mean more people make larger down payments in order to quality for mortgage loans.

Mr. Neziol says private insurers play an important role in the market by providing more choice for lenders and helping to educate the public about options. "It gives options to consumers," he says. "It's good for lenders to have a choice in terms of what insurance providers would do."

You don't have to be a first-time buyer in order to qualify. Plus, even conventional mortgages, those with 20% or more down, can be insured. This can happen if a loan is slightly outside of a lender's usual parameters.

And there can be a rental component. A buyer can purchase a duplex with 5% down, for instance, but must live in one unit. A 10% down payment is the norm for three-and four-unit properties, where one unit is owneroccupied and the others are rented out. The point, Mr. Neziol says, is to be aware of the many options available.

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